A sizeable rebound was in the works until the afternoon where sellers took over sending stocks to the lows of the session. Retail sales came in better than expected thanks to a surge in auto sales. The story of the session was once again the fall in crude oil prices. As the commodity dropped towards a 50 handle sellers took to stocks pushing them to the lows of the session. By the close the VIX was above 20 for the first time since October. Fear has certainly grown as many are worried about a credit event in the High Yield market. The reversal is not a good sign, but we were able to hang onto gains. We are still exercising caution and our market model remains in neutral mode.
The last time we had the VIX jump above 20 the S&P 500 was down nearly 10% from its most recent high. This time around we are not even 3% off the all-time high. Are VIX traders over reacting to the possibility of default? HYG and JNK are certainly selling off as if something is about to occur whether it be a default or not. If crude oil continues to fall the possibility of default will likely rise. This is the danger of the situation. The opportunity is what happens when crude oil falls and what that does to prices across the board. Lower crude prices means lower prices for distillates. This includes plastics from water bottles to packaging. We could very easily roll over here, but there are no guarantees. Price action is warranting caution and we will remain cautious until we get a clear direction from the market.
Sentiment has not changed much week over week. The recent decline did not change the minds of investors. NAAIM exposure index rose from 86 to 89. Perhaps many active money managers were not overweight energy names. AAII Bulls rose from 42 to 45 and bears dropped to 22%. Not the reaction I would have thought from those responding to sentiment surveys. I will say we are not even 3% off the highs so a drop in bullishness really is not that surprising.
Not the type of day you want to see from the market, but we were able to close in the green. Had this market turned negative and closed there it would have been extremely negative. Take advantage of the lower gas prices and get out and enjoy the holiday season.
